Since the dawn of time, decision theorists have wondered why expected utility is the right way to evaluate options. Sure, it satisfies the usual axioms of decision theory, like von Neumann & Morgenstern’s independence axiom or Savage’s sure-thing principle. But so do other decision rules. For example, suppose there are three possible outcomes, with utilities $1$, $4$, and $9$. And imagine that you evaluate a gamble where the probabilities of these outcomes are, respectively, $p_1$, $p_2$, and $p_3$, using the following formula: $$ p_1 \sqrt{1} + p_2 \sqrt{4} + p_3 \sqrt{9}.... Read more

This post is coauthored with Johanna Thoma and cross-posted at Choice & Inference. Accompanying Mathematica code is available on GitHub. Lara Buchak’s Risk & Rationality advertises REU theory as able to recover the modal preferences in the Allais paradox. In our commentary we challenged this claim. We pointed out that REU theory is strictly “grand-world”, and in the grand-world setting it actually struggles with the Allais preferences. To demonstrate, we constructed a grand-world model of the Allais problem.... Read more